I’ve spent the last few months talking to many other VCs who are founders of their own VC firms or have ascended to leadership roles in firms they joined. Each of them seems to have his or her own strategy and goals for what they want to build. The one common conversation we’ve had, regardless of strategy and goals, concerns the tension between investing and managing a growing venture capital firm. Many of us entered the venture capital business to invest in companies and support startups. As firms grow and scale, there is increasing tension between the desire to invest and the management demands associated with leading a firm.
To be clear, even an emerging manager on his or her first fund with no full-time employees will spend time on management tasks beyond investing. Other than investing one’s own capital as an angel investor, I don’t believe there’s a way to be a VC without management taking up some portion of your time. This post is more about the tension between investing and management emerging as firms grow than about finding creative ways to remove all management responsibilities.
The one interesting thing that emerged from all of these conversations was that a relatively small set of factors seemed to have the most impact on the amount of time spent investing versus on management:
Assets Under Management (AUM) – Assets under management drive management fees, and management fees govern the budgeting decisions about how large a team a venture capital firm can have. I know of very few firms with less than $100 million AUM with large teams and relatively few firms with $1 billion or more in AUM that don’t have large teams. Increasing AUM tends to lead to larger teams and hence more management responsibility. There are some notable exceptions to this rule, and those firms have intentionally stayed small.
Team Composition – Management demands increase with the number of non-Partner people on the team. Whether you have analysts and associates, a platform team, or in-house operations and finance resources, management load increases with the number of non-GPs on the team. Generally speaking, Partners don’t spend much time managing each other, so most of the management load comes from the number of people who have non-investing roles in the firm.
Product Assortment – The more investment strategies (products) a firm has, the more time the leadership team will spend on management. This makes sense; having a seed, Series A, and growth strategy all under the same roof increases the amount of time the leaders of the firm need to spend keeping aware of what each of those groups is doing.
Firm Leadership Ambition and Goals – Some people want to build big firms with lots of people, lots of AUM, and lots of products. Other people want to keep things lean, GP-only, and simple. In many ways, the most important thing is what the founders and leaders want to build. The outputs often flow from that core decision.
In the end, being thoughtful about what you want to build will hopefully keep you from finding yourself in a place where you don’t like the way you’re spending your time. It’s no fun to build something that you don’t enjoy operating.
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